The Macroeconomic Risks of Undesirably Low Inflation
Jonas Arias, Christopher J. Erceg, Mathias Trabandt
European Economic Review,
2016
Abstract
This paper investigates the macroeconomic risks associated with undesirably low inflation using a medium-sized New Keynesian model. We consider different causes of persistently low inflation, including a downward shift in long-run inflation expectations, a fall in nominal wage growth, and a favorable supply-side shock. We show that the macroeconomic effects of persistently low inflation depend crucially on its underlying cause, as well as on the extent to which monetary policy is constrained by the zero lower bound. Finally, we discuss policy options to mitigate these effects.
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Impulse Response Analysis in a Misspecified DSGE Model: A Comparison of Full and Limited Information Techniques
Sebastian Giesen, Rolf Scheufele
Applied Economics Letters,
No. 3,
2016
Abstract
In this article, we examine the effect of estimation biases – introduced by model misspecification – on the impulse responses analysis for dynamic stochastic general equilibrium (DSGE) models. Thereby, we use full and limited information estimators to estimate a misspecified DSGE model and calculate impulse response functions (IRFs) based on the estimated structural parameters. It turns out that IRFs based on full information techniques can be unreliable under misspecification.
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Lend Global, Fund Local? Price and Funding Cost Margins in Multinational Banking
Rients Galema, Michael Koetter, C. Liesegang
Review of Finance,
No. 5,
2016
Abstract
In a proposed model of a multinational bank, interest margins determine local lending by foreign affiliates and the internal funding by parent banks. We exploit detailed parent-affiliate-level data of all German banks to empirically test our theoretical predictions in pre-crisis times. Local lending by affiliates depends negatively on price margins, the difference between lending and deposit rates in foreign markets. The effect of funding cost margins, the gap between local deposit rates faced by affiliates abroad and the funding costs of their parents, on internal capital market funding is positive but statistically weak. Interest margins are central to explain the interaction between internal capital markets and foreign affiliates lending.
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Effects of Incorrect Specification on the Finite Sample Properties of Full and Limited Information Estimators in DSGE Models
Sebastian Giesen, Rolf Scheufele
Journal of Macroeconomics,
June
2016
Abstract
In this paper we analyze the small sample properties of full information and limited information estimators in a potentially misspecified DSGE model. Therefore, we conduct a simulation study based on a standard New Keynesian model including price and wage rigidities. We then study the effects of omitted variable problems on the structural parameter estimates of the model. We find that FIML performs superior when the model is correctly specified. In cases where some of the model characteristics are omitted, the performance of FIML is highly unreliable, whereas GMM estimates remain approximately unbiased and significance tests are mostly reliable.
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Unemployment and Business Cycles
Lawrence J. Christiano, Martin S. Eichenbaum, Mathias Trabandt
Econometrica,
No. 4,
2016
Abstract
We develop and estimate a general equilibrium search and matching model that accounts for key business cycle properties of macroeconomic aggregates, including labor market variables. In sharp contrast to leading New Keynesian models, we do not impose wage inertia. Instead we derive wage inertia from our specification of how firms and workers negotiate wages. Our model outperforms a variant of the standard New Keynesian Calvo sticky wage model. According to our estimated model, there is a critical interaction between the degree of price stickiness, monetary policy, and the duration of an increase in unemployment benefits.
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Macroeconomic Trade Effects of Vehicle Currencies: Evidence from 19th Century China
Makram El-Shagi, Lin Zhang
Abstract
We use the Chinese experience between 1867 and 1910 to illustrate how the volatility of vehicle currencies affects trade. Today’s widespread vehicle currency is the dollar. However, the macroeconomic effects of this use of the dollar have rarely been addressed. This is partly due to identification problems caused by its international importance. China had adopted a system, where silver was used almost exclusively for trade, similar to a vehicle currency. While being important for China, the global role of silver was marginal, alleviating said identification problems. We develop a bias corrected structural VAR showing that silver price fluctuations significantly affected trade.
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Taxation, Corruption, and Growth
Philippe Aghion, Ufuk Akcigit, Julia Cagé, William R. Kerr
European Economic Review,
2016
Abstract
We build an endogenous growth model to analyze the relationships between taxation, corruption, and economic growth. Entrepreneurs lie at the center of the model and face disincentive effects from taxation but acquire positive benefits from public infrastructure. Political corruption governs the efficiency with which tax revenues are translated into infrastructure. The model predicts an inverted-U relationship between taxation and growth, with corruption reducing the optimal taxation level. We find evidence consistent with these predictions and the entrepreneurial channel using data from the Longitudinal Business Database of the US Census Bureau. The marginal effect of taxation for growth for a state at the 10th or 25th percentile of corruption is significantly positive; on the other hand, the marginal effects of taxation for growth for a state at the 90th percentile of corruption are much lower across the board. We make progress towards causality through Granger-style tests and by considering periphery counties where effective tax policy is largely driven by bordering states. Finally, we calibrate our model and find that the calibrated taxation rate of 37% is fairly close to the model׳s estimated welfare maximizing taxation rate of 42%. Reducing corruption provides the largest potential impact for welfare gain through its impact on the uses of tax revenues.
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Time-varying Volatility, Financial Intermediation and Monetary Policy
S. Eickmeier, N. Metiu, Esteban Prieto
IWH Discussion Papers,
No. 19,
2016
Abstract
We document that expansionary monetary policy shocks are less effective at stimulating output and investment in periods of high volatility compared to periods of low volatility, using a regime-switching vector autoregression. Exogenous policy changes are identified by adapting an external instruments approach to the non-linear model. The lower effectiveness of monetary policy can be linked to weaker responses of credit costs, suggesting a financial accelerator mechanism that is weaker in high volatility periods. To rationalize our robust empirical results, we use a macroeconomic model in which financial intermediaries endogenously choose their capital structure. In the model, the leverage choice of banks depends on the volatility of aggregate shocks. In low volatility periods, financial intermediaries lever up, which makes their balance sheets more sensitive to aggregate shocks and the financial accelerator more effective. On the contrary, in high volatility periods, banks decrease leverage, which renders the financial accelerator less effective; this in turn decreases the ability of monetary policy to improve funding conditions and credit supply, and thereby to stimulate the economy. Hence, we provide a novel explanation for the non-linear effects of monetary stimuli observed in the data, linking the effectiveness of monetary policy to the procyclicality of leverage.
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Central Bank Transparency and Cross-border Banking
Stefan Eichler, Helge Littke, Lena Tonzer
Abstract
We analyze the effect of central bank transparency on cross-border bank activities. Based on a panel gravity model for cross-border bank claims for 21 home and 47 destination countries from 1998 to 2010, we find strong empirical evidence that a rise in central bank transparency in the destination country, on average, increases cross-border claims. Using interaction models, we find that the positive effect of central bank transparency on cross-border claims is only significant if the central bank is politically independent. Central bank transparency and credibility are thus considered complements by banks investing abroad.
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Does the Technological Content of Government Demand Matter for Private R&D? Evidence from US States
Viktor Slavtchev, Simon Wiederhold
American Economic Journal: Macroeconomics,
No. 2,
2016
Abstract
Governments purchase everything from airplanes to zucchini. This paper investigates the role of the technological content of government procurement in innovation. In a theoretical model, we first show that a shift in the composition of public purchases toward high-tech products translates into higher economy-wide returns to innovation, leading to an increase in the aggregate level of private R&D. Using unique data on federal procurement in US states and performing panel fixed-effects estimations, we find support for the model's prediction of a positive R&D effect of the technological content of government procurement. Instrumental-variable estimations suggest a causal interpretation of our findings.
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